Lesson 1 of 7 · 14 min

Bullet, fully amortizing and partially amortizing bonds

A bullet bond pays only interest until it returns all principal at maturity, an amortizing bond returns principal along the way with a level payment, and a partially amortizing bond does a bit of both by leaving a balloon at the end.

In short

  • Bullet bond: fixed coupons that are interest only; the whole principal comes back with the last coupon.
  • Fully amortizing: a level periodic payment of interest plus principal that brings the balance to zero at maturity (mortgages are the classic case).
  • Partially amortizing: level payments repay part of the principal; the rest is a balloon payment at maturity.
  • Level payment: A=r×Principal1−(1+r)−NA = \dfrac{r \times \text{Principal}}{1-(1+r)^{-N}}. Inside it, interest shrinks and principal grows each period.
  • Earlier principal repayment means lower credit risk but higher reinvestment risk for the investor.

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Bullet, fully amortizing and partially amortizing bonds · Fixed-Income Cash Flows and Types